Alternative capital vehicles coming into the market are causing reinsurers to re-evaluate their business models, said a top asset manager.A panel of Bermuda-based insurance-linked securities experts spoke at the annual Bermuda (Re) insurance Conference, sponsored by PwC and Standard & Poors, about their future in the marketplace and how they see themselves as complementary to the reinsurance industry instead of as competitors.“Reinsurers are struggling how to make sense of their business model,” said Frank Majors, managing director of Nephila Capital, adding that reinsurers will blame alternative capital vehicles for suppressing rates and the next quarter launch one, bringing additional capital to market. “I think people are realising that they’d better get with this.”Earlier this year, reinsurance CEOs said at an industry conference that they felt the “deluge” of capital entering the market from several directions was suppressing reinsurance rates.“Bermuda Inc should not think about the rate environment, which is volatile, you’re just along for the ride,” said Mr Majors. “What the rate environment is shouldn’t matter, it should be your return on equity.”Nephila Capital, which is not associated with a reinsurer, has grown within a year from assets of $4 billion under management to approximately $7 billion. In August, the company attracted a $50 million investment from Ipac Asset Management, according to the Artemis.bm website.Mr Majors explained that by better utilising insurance-linked securities, the reinsurance landscape would likely change, but for the better, helping companies trade at a higher book value.“If they (reinsurers) can isolate and outsource the pure cat risk then they can hold less capital,” he said. “They can hold capital that commensurates with the risk that they are keeping. So you’ll see smaller companies that are valued for their expertise. If reinsurers held less capital and the capital is appropriate to the risk they maintain, then they can trade at much higher multiples. You get paid for expertise.“The occurrence or nonoccurrence of a cat is a commodity risk,” he added. “Underwriting expertise is a value ad. Get rid of the commodity risk as cheaply as possible, highlight the value ad, hold less capital, and you’ll see higher multiples and higher returns on equity.”He added that alternative capital providers can bring lower cost to capital where “reinsurers hold all the residual risk and we’ll assume the risk of an occurrence or non-occurrence of a catastrophe in its cleanest form”.Along with fellow panellist, Lixin Zeng, CEO of AlphaCat, part of the Validus Group, Mr Majors felt that insurance-linked securities are complementary to traditional reinsurance, not competitors.“We always see third-party capital as complementary,” said Mr Zeng, who added that Validus has had a sidecar from the beginning.“We’re not trying to undercut the reinsurers and get their place on programmes,” added Mr Majors. “We’re more excited to grow the market.”